I have the same dilema.....when my eldest son died, it took me quite a bit of sorting to get photos of just him or where he was the main focus out of the pile.
I have started by sorting the pictures into plastic bags for each child and a bag that contains pictures that include all 4 that i feel should be included for each of them. I have purchased expandable photo/scrapbook albums for each and have begun to sort each child's pictures in order by age (ie: newborn to 1st birthday, up thru the newest pics of each)....by having an expandable album it can grow as they grow, and the scrapbook pages only limit me to photos that are 12 by 12 so the 8x10's can be included.
Like you I see this as an overwhelming task...but I think I am on track. I also thought about scanning them and putting them on a DVD, but decided that since our technology is constantly changing (look at the VHS tapes many of us have that are no longer relevant as a good storage media) that real paper photos would be best and maybe I will back them up with a DVD that i can place in a pocket in the book. I think the point is that when the children grow up, they will want to see these pictures....books are still around and I don't see them ever really disappearing entirely, so...hard copy books for each child are my plan. Of course I intend to include the "group" pictures for each child so that they have record of their siblings as well..
I have started the first album and began with a few pictures of myself and my children's father as we were growing up and have set aside pictures of other ancestors ( my great grandmother, his grandparents, etc) ...I made copies for each of them.... that I feel should be included...nothing tells me more about who I am than looking at what influenced me throughout my lifetime and of course, that includes the family that influenced my parents.
Don't think you should accomplish this in one afternoon/evening......think about it. Set aside a box that you can sort thru bit by bit...it can be fun to look thru the photos and relaxing. Keep it interesting, share it with your kids...and then decide if you want to complete the album(s) 1 by 1, or let them each begin and grow bit by bit. If your kids are old enough to help, you may find this a fun family project. With out the "creative" scrapbook stigma, remember to include captions, narratives or other things that will help tie your memories of the time with the photos you select. By having the kids help, they can include information like who the children attending their 6th birthday party are!..I know I can't remember the other children's names...but my daughter did!
One of my son's will be getting married this year....I have a goal of getting his album completed before the wedding, his fiance has been great about helping me sort his pictures and put them in order....I think I will make a copy of the finished album for myself and give him the original. I'm sure it will serve as a fine memory piece of his childhood for both of us.